2Q24 results were significantly higher than our and market expectations

HSBC Holdings announced 2Q24 results: revenue of $16.701 billion (+2.7% and +3.4% compared to our and market expectations), a year-on-year decrease of 1.4%; profit before tax of $9.099 billion (+15.4% and +16.4% compared to our and market expectations), up 0.9% year-on-year. The better performance than ours and market expectations is mainly due to good revenue performance and lower credit costs.

Development trends

Net interest income was slightly better than our and market expectations, and the company raised the 2024E guidelines. HSBC's 2Q24 banking net interest income (Banking NII) was 10.9 billion dollars, down 3.5% from the previous month. The main influencing factors include: 1) the negative impact of Canadian business output of 0.3 billion US dollars; 2) the decline in Hong Kong dollar interest rates dragged down 0.1 billion US dollars. HSBC raised its annual Banking NII guidelines to 43 billion US dollars, which implied the assumption that the Argentine business would contribute 1 billion US dollars to Banking NII. In fact, the 1H24 Argentina business has contributed a total of 0.9 billion US dollars to Banking NII. Due to the high volatility of the Argentine business, we believe that the company did not adjust this assumption due to careful considerations.

Details of structural hedging were disclosed, and interest rate sensitivity declined markedly. HSBC revealed details of structural hedging this quarter: 1) The company's structured hedging balance at the end of 2Q24 totaled 504 billion US dollars, an increase of 25 billion US dollars over the end of the previous year, with an average interest rate of 2.8%; 2) The company expects the structural hedging of 55 billion US dollars and 105 billion US dollars to expire in 1H24 and 2025, respectively, with an average interest rate of 2.8%. Thanks to increased structural hedging, the sensitivity of HSBC Banking NII interest rate changes per 100 bps declined further from $3.4 billion at the end of the previous year to $2.7 billion. At the company's performance meeting, it was stated that the scale of structural hedging will be further increased, and the pace of the second half of the year may be close to that of the first half of the year.

The loan outlook is positive. Excluding exchange rate factors, HSBC customer loans increased 1% month-on-month and customer deposits increased 2% month-on-month at the end of 2Q24. There is still a drag on public loans in Hong Kong, China, but demand in other Asian markets is good, and UK mortgages continue to grow. At the company's earnings conference, it was stated that it saw signs that demand for loans in the Hong Kong, China and UK markets was beginning to stabilize, and that if interest rate cuts were initiated, it would also help improve demand. (Continued text) Profit forecasting and valuation

Since the company brought forward the deadline for completing the sale of the Argentine business to 2H24, we expect the relevant 5 billion US dollar foreign exchange reserve loss to be recorded in 2024e. However, as we emphasized earlier, this is only an internal adjustment of shareholders' equity and capital adequacy ratio, nor does it affect the company's dividends and repurchases. However, based on this change in forecast, we lowered our 2024E profit forecast by 17.0% to $22.051 billion and raised our 2025E profit forecast by 33.0% to $21.82 billion.

The current stock price corresponds to 1.0 times the 2024E net market ratio and 0.9 times the 2025E net market ratio. It maintained an outperforming industry rating, but since we expect the company's adjusted ROTE to be better than previously anticipated, the target price was raised by 5.7% to HK$87.3, which corresponds to 1.3 times the 2024E net market ratio and 1.2 times the 2025E net market ratio, and there is 24.8% upside compared to the current stock price.

risks

Interest rate cuts have exceeded requirements, and the macroeconomy of the main market has weakened beyond expectations.